Don Young of Menlo Park has a timely question: "I am reading lately about billions of bailout dollars being repaid to the U.S. Treasury, but I do not recall hearing or reading about how these funds are used after being returned. Are they simply unaccounted for in the big scheme of things? Used to reduce the debt? Or put into a new congressional slush fund? Have you written on this issue? If not, can you point me to a site that tells me, the answer, if there is one?"

Unfortunately there is no simple answer. Some Republicans say that any money returned to the Troubled Assets Relief Program or TARP, must go toward deficit reduction. President Obama and some Democrats say unused TARP money can be used for all sorts of things.

On Wednesday, the House narrowly passed the Jobs for Main Street Act of 2010, an amendment to HR2847. House Speaker Nancy Pelosi says the bill would "redirect" $75 billion in TARP funds to pay for highways, transit and other infrastructure; to hire or retain teachers, police and firefighters; and to subsidize loans to small businesses.

The bill would spend an additional $79 billion to extend unemployment benefits, Cobra subsidies and Medicaid payments. That spending is considered "emergency," so it would not be paid for with taxes, spending cuts or TARP money.

No Republicans voted for the bill and 38 Democrats voted against it. The Senate won't take it up until next year, but some Republicans are already vowing to fight it.

TARP background

TARP was created by the Emergency Economic Stabilization Act in October 2008. It was designed to buy toxic mortgage assets from banks, giving them enough liquid capital to unfreeze the credit markets and prevent a financial meltdown.

(The act creating TARP was separate from the $787 stimulus bill passed in February that was designed specifically to "save or create" at least 3 million jobs. That bill was also deemed an emergency measure and therefore was not paid for with taxes, spending cuts or TARP money.)

The act authorized the Treasury to buy up to $700 billion in troubled assets, defined as mortgage-related assets and "any other financial instrument" that the Treasury secretary "determines the purchase of which is necessary to promote financial market stability." The Treasury used the second definition to buy stock and debt in banks, insurance companies and automakers, to pay for mortgage modifications and support small-business lending.

Very roughly speaking, the Congressional Budget Office estimated that about half the money invested under TARP would come back to taxpayers and the other half would not.

Last week, Herb Allison, who is overseeing TARP, said the Treasury has spent $370 billion and expects to spend a total of $550 billion. TARP was supposed to terminate at the end of this year, but Treasury Secretary Timothy Geithner recently exercised his authority to extend it until Oct. 3.

About $245 billion has gone into banks, which have already returned $116 billion. When Citigroup and Wells Fargo complete their announced repayments, that sum will total $161 billion. Treasury ultimately expects to receive $185 billion in repayments.

It also has received $16 billion in income consisting of interest, dividends and profits from the sale of warrants.

Recycling TARP

Section 106 of the TARP act says that "Revenues of, and proceeds from the sale of troubled assets purchased under this Act, or from the sale, exercise, or surrender of warrants or senior debt instruments acquired under section 113 shall be paid into the general fund of the Treasury for reduction of the public debt."

But the Treasury department says that section pertains only to earnings from warrants, interest, fees and dividends, not to repayments.

What's not entirely clear is whether money returned to TARP can be recycled for other uses.

A Treasury spokeswoman says that when a financial institution repays a TARP investment, "Proceeds are deposited into the Treasury general fund for reduction of the public debt. Upon each such repayment and sale, the total amount of troubled assets that are held by Treasury and count against the $700 million statutory cap is reduced because such troubled assets are no longer 'outstanding.' "

House Democrats seem to say that half of every dollar not spent on TARP can be spent elsewhere without increasing the deficit, because CBO assumes that half of TARP disbursements would be repaid and the other half would be deficit spending.

"Repayments are available for whatever the Treasury Secretary decides is needed to meet the original financial stabilization purposes of the TARP, or if unused while the law is still in effect, for whatever Congress decides they should be used for, such as the jobs package," says Pelosi spokesman Brendan Daly.

"We are taking $150 billion from TARP to pay for $75 billion in the jobs package - TARP takes a double hit because that's how CBO scores it. And the $150 billion taken for the jobs package is no longer available for TARP purposes - so we're in effect reducing by $150 billion the $700 billion in TARP authority Congress gave to the Treasury secretary," Daly says.

In this sense, the jobs bill would not increase the deficit by any more than originally expected, but it would still increase the deficit.

Donald Marron, a visiting professor at the Georgetown Public Policy Institute, who has written about this subject at dmarron.com, says his "best guess" is that the House plan is not allowable under Section 204 of the TARP act, which says, in complicated budgetary language, that TARP rescissions can't be used to pay for new spending.

Even if Congress does manage to use TARP "savings" to pay for a jobs bill, Marron says these are savings "that exist in the mythical world but not in the real world." It's like taking out a $20,000 line of credit to do a home renovation. The renovation only costs $10,000, so you use $10,000 to take a vacation. You have "saved" money on the home renovation, but you are still $20,000 in debt.